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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

OR

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

 

Commission file number:  001-33221

 

HERON THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of

incorporation or organization)

94-2875566

(I.R.S. Employer

Identification No.)

 

 

4242 Campus Point Court, Suite 200

San Diego, CA

92121

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (858) 251-4400

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.01 per share

 

HRTX

 

The Nasdaq Capital Market

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No   

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes      No  

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes      No  

 

The number of shares of the registrant’s common stock, par value $0.01 per share, outstanding as of July 17, 2019 was 79,816,417.

 

 

 


HERON THERAPEUTICS, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED June 30, 2019

TABLE OF CONTENTS

 

PART I.

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

ITEM 1.

 

Condensed Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2019 (Unaudited) and December 31, 2018

 

2

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2019 and 2018 (Unaudited)

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the Six Months Ended June 30, 2019 and 2018 (Unaudited)

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018 (Unaudited)

 

6

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

7

 

 

 

 

 

ITEM 2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

18

 

 

 

 

 

ITEM 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

28

 

 

 

 

 

ITEM 4.

 

Controls and Procedures

 

28

 

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

 

 

 

 

 

ITEM 1.

 

Legal Proceedings

 

29

 

 

 

 

 

ITEM 1A.

 

Risk Factors

 

29

 

 

 

 

 

ITEM 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

53

 

 

 

 

 

ITEM 3.

 

Defaults upon Senior Securities

 

53

 

 

 

 

 

ITEM 4.

 

Mine Safety Disclosures

 

53

 

 

 

 

 

ITEM 5.

 

Other Information

 

53

 

 

 

 

 

ITEM 6.

 

Exhibits

 

54

 

 

 

 

 

 

 

SIGNATURES

 

55

 

1


PART I.

FINANCIAL INFORMATION

ITEM 1.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

HERON THERAPEUTICS, INC.

Condensed Consolidated Balance Sheets

(in thousands)

 

 

 

June 30,

2019

 

 

December 31,

2018

 

 

 

(unaudited)

 

 

(see Note 2)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

53,038

 

 

$

31,836

 

Short-term investments

 

 

222,967

 

 

 

300,535

 

Accounts receivable, net

 

 

66,821

 

 

 

64,652

 

Inventory

 

 

29,270

 

 

 

39,032

 

Prepaid expenses and other current assets

 

 

8,739

 

 

 

11,193

 

Total current assets

 

 

380,835

 

 

 

447,248

 

Property and equipment, net

 

 

17,910

 

 

 

14,677

 

Right-of-use lease assets

 

 

12,667

 

 

 

 

Other assets

 

 

254

 

 

 

254

 

Total assets

 

$

411,666

 

 

$

462,179

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

7,997

 

 

$

16,863

 

Accrued clinical and manufacturing liabilities

 

 

25,383

 

 

 

24,470

 

Accrued payroll and employee liabilities

 

 

8,982

 

 

 

13,397

 

Other accrued liabilities

 

 

45,891

 

 

 

32,715

 

Current lease liabilities

 

 

1,722

 

 

 

 

Convertible notes payable to related parties, net of discount

 

 

5,081

 

 

 

4,574

 

Total current liabilities

 

 

95,056

 

 

 

92,019

 

Non-current lease liabilities

 

 

11,251

 

 

 

 

Total liabilities

 

 

106,307

 

 

 

92,019

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock

 

 

798

 

 

 

782

 

Additional paid-in capital

 

 

1,378,368

 

 

 

1,330,186

 

Accumulated other comprehensive income (loss)

 

 

148

 

 

 

(87

)

Accumulated deficit

 

 

(1,073,955

)

 

 

(960,721

)

Total stockholders’ equity

 

 

305,359

 

 

 

370,160

 

Total liabilities and stockholders’ equity

 

$

411,666

 

 

$

462,179

 

 

See accompanying notes.

2


HERON THERAPEUTICS, INC.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(unaudited)

(in thousands, except per share amounts)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net product sales

 

$

36,659

 

 

$

17,277

 

 

$

68,261

 

 

$

28,844

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of product sales

 

 

13,588

 

 

 

5,231

 

 

 

28,550

 

 

 

8,364

 

Research and development

 

 

41,425

 

 

 

30,159

 

 

 

84,397

 

 

 

69,720

 

General and administrative

 

 

9,778

 

 

 

6,209

 

 

 

19,426

 

 

 

13,237

 

Sales and marketing

 

 

23,647

 

 

 

14,531

 

 

 

52,367

 

 

 

28,366

 

Total operating expenses

 

 

88,438

 

 

 

56,130

 

 

 

184,740

 

 

 

119,687

 

Loss from operations

 

 

(51,779

)

 

 

(38,853

)

 

 

(116,479

)

 

 

(90,843

)

Other income (expense), net

 

 

1,557

 

 

 

183

 

 

 

3,245

 

 

 

(92

)

Net loss

 

 

(50,222

)

 

 

(38,670

)

 

 

(113,234

)

 

 

(90,935

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on short-term investments

 

 

112

 

 

 

17

 

 

 

235

 

 

 

(15

)

Comprehensive loss

 

$

(50,110

)

 

$

(38,653

)

 

$

(112,999

)

 

$

(90,950

)

Basic and diluted net loss per share

 

$

(0.63

)

 

$

(0.54

)

 

$

(1.43

)

 

$

(1.33

)

Shares used in computing basic and diluted net loss per share

 

 

79,548

 

 

 

71,952

 

 

 

78,987

 

 

 

68,358

 

 

See accompanying notes.

3


HERON THERAPEUTICS, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(unaudited)

(in thousands)

 

 

 

Common Stock

 

 

Additional

 

 

Accumulated

Other

 

 

 

 

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

Paid-In

Capital

 

 

Comprehensive

(Loss) Income

 

 

Accumulated

Deficit

 

 

Stockholders’

Equity

 

Balance as of December 31, 2018

 

 

78,174

 

 

$

782

 

 

$

1,330,186

 

 

$

(87

)

 

$

(960,721

)

 

$

370,160

 

Conversion benefit included in Convertible Notes

   issued

 

 

 

 

 

 

 

 

102

 

 

 

 

 

 

 

 

 

102

 

Issuance of common stock on exercise of stock

   options

 

 

732

 

 

 

7

 

 

 

6,532

 

 

 

 

 

 

 

 

 

6,539

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

17,902

 

 

 

 

 

 

 

 

 

17,902

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(63,012

)

 

 

(63,012

)

Net unrealized gain on short-term investments

 

 

 

 

 

 

 

 

 

 

 

123

 

 

 

 

 

 

123

 

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(62,889

)

Balance as of March 31, 2019

 

 

78,906

 

 

 

789

 

 

 

1,354,722

 

 

 

36

 

 

 

(1,023,733

)

 

 

331,814

 

Conversion benefit included in Convertible Notes

   issued

 

 

 

 

 

 

 

 

103

 

 

 

 

 

 

 

 

 

103

 

Issuance of common stock on exercise of stock

   options

 

 

810

 

 

 

8

 

 

 

9,668

 

 

 

 

 

 

 

 

 

9,676

 

Issuance of common stock on under the employee

   stock purchase plan

 

 

63

 

 

 

1

 

 

 

1,169

 

 

 

 

 

 

 

 

 

1,170

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

12,706

 

 

 

 

 

 

 

 

 

12,706

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(50,222

)

 

 

(50,222

)

Net unrealized gain on short-term investments

 

 

 

 

 

 

 

 

 

 

 

112

 

 

 

 

 

 

112

 

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(50,110

)

Balance as of June 30, 2019

 

 

79,779

 

 

$

798

 

 

$

1,378,368

 

 

$

148

 

 

$

(1,073,955

)

 

$

305,359

 

 

 

See accompanying notes.

4


 

 

 

Common Stock

 

 

Additional

 

 

Accumulated

Other

 

 

 

 

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

Paid-In

Capital

 

 

Comprehensive

Loss

 

 

Accumulated

Deficit

 

 

Stockholders’

Equity

 

Balance as of December 31, 2017

 

 

64,609

 

 

$

646

 

 

$

913,955

 

 

$

(10

)

 

$

(783,455

)

 

$

131,136

 

Cumulative effect of adoption of new accounting

   standard

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,573

 

 

 

1,573

 

Issuance of common stock in public offerings, net

 

 

 

 

 

 

 

 

(205

)

 

 

 

 

 

 

 

 

(205

)

Conversion benefit included in Convertible Notes

   issued

 

 

 

 

 

 

 

 

96

 

 

 

 

 

 

 

 

 

96

 

Issuance of common stock on exercise of stock

   options

 

 

435

 

 

 

4

 

 

 

4,198

 

 

 

 

 

 

 

 

 

4,202

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

7,701

 

 

 

 

 

 

 

 

 

7,701

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(52,265

)

 

 

(52,265

)

Net unrealized loss on short-term investments

 

 

 

 

 

 

 

 

 

 

 

(32

)

 

 

 

 

 

(32

)

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(52,297

)

Balance as of March 31, 2018

 

 

65,044

 

 

 

650

 

 

 

925,745

 

 

 

(42

)

 

 

(834,147

)

 

 

92,206

 

Cumulative effect of adoption of new accounting

   standard

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

1

 

Issuance of common stock in public offerings, net

 

 

11,963

 

 

 

120

 

 

 

363,212

 

 

 

 

 

 

 

 

 

363,332

 

Conversion benefit included in Convertible Notes

   issued

 

 

 

 

 

 

 

 

97

 

 

 

 

 

 

 

 

 

97

 

Issuance of common stock on exercise of stock

   options

 

 

504

 

 

 

5

 

 

 

6,434

 

 

 

 

 

 

 

 

 

6,439

 

Issuance of common stock under the Employee Stock

   Purchase Plan

 

 

49

 

 

 

 

 

 

648

 

 

 

 

 

 

 

 

 

648

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

7,821

 

 

 

 

 

 

 

 

 

7,821

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(38,670

)

 

 

(38,670

)

Net unrealized gain on short-term investments

 

 

 

 

 

 

 

 

 

 

 

17

 

 

 

 

 

 

17

 

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(38,653

)

Balance as of June 30, 2018

 

 

77,560

 

 

$

775

 

 

$

1,303,957

 

 

$

(25

)

 

$

(872,816

)

 

$

431,891

 

 

 

See accompanying notes.

5


HERON THERAPEUTICS, INC.

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

 

 

 

Six Months Ended

June 30,

 

 

 

2019

 

 

2018

 

Operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(113,234

)

 

$

(90,935

)

Adjustments to reconcile net loss to net cash used for operating activities:

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

30,608

 

 

 

15,522

 

Depreciation and amortization

 

 

959

 

 

 

711

 

Amortization of debt discount

 

 

507

 

 

 

428

 

Realized gain on short-term investments

 

 

(8

)

 

 

 

Accretion of discount on short-term investments

 

 

(2,437

)

 

 

(864

)

Impairment on property and equipment

 

 

54

 

 

 

 

Loss on disposal of property and equipment

 

 

53

 

 

 

3

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(2,169

)

 

 

(4,012

)

Prepaid expenses and other assets

 

 

2,454

 

 

 

(3,039

)

Inventory

 

 

9,762

 

 

 

(17,287

)

Accounts payable

 

 

(8,866

)

 

 

(13,790

)

Accrued clinical and manufacturing liabilities

 

 

913

 

 

 

(8,934

)

Accrued payroll and employee liabilities

 

 

(4,415

)

 

 

(1,974

)

Other accrued liabilities

 

 

13,687

 

 

 

1,729

 

Net cash used for operating activities

 

 

(72,132

)

 

 

(122,442

)

Investing activities:

 

 

 

 

 

 

 

 

Purchases of short-term investments

 

 

(204,358

)

 

 

(157,885

)

Maturities and sales of short-term investments

 

 

284,606

 

 

 

22,500

 

Purchases of property and equipment

 

 

(4,299

)

 

 

(2,238

)

Net cash provided by (used for) investing activities

 

 

75,949

 

 

 

(137,623

)

Financing activities:

 

 

 

 

 

 

 

 

Net proceeds from sale of common stock

 

 

 

 

 

363,127

 

Proceeds from stock option exercises

 

 

16,215

 

 

 

10,641

 

Proceeds from purchases under the Employee Stock Purchase Plan

 

 

1,170

 

 

 

648

 

Net cash provided by financing activities

 

 

17,385

 

 

 

374,416

 

Net increase in cash and cash equivalents

 

 

21,202

 

 

 

114,351

 

Cash and cash equivalents at beginning of year

 

 

31,836

 

 

 

144,583

 

Cash and cash equivalents at end of period

 

$

53,038

 

 

$

258,934

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Interest paid

 

$

 

 

$

1,000

 

Cumulative effect of adoption of new accounting standard

 

$

 

 

$

1,574

 

 

See accompanying notes.

 

6


HERON THERAPEUTICS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

In this Quarterly Report on Form 10-Q, all references to “Heron,” the “Company,” “we,” “us,” “our” and similar terms refer to Heron Therapeutics, Inc. and its wholly-owned subsidiary, Heron Therapeutics B.V. Heron Therapeutics®, the Heron logo, SUSTOL®, CINVANTI® and Biochronomer® are our trademarks. All other trademarks appearing or incorporated by reference into this Quarterly Report on Form 10-Q are the property of their respective owners.

1. Business

We are a commercial-stage biotechnology company focused on improving the lives of patients by developing best-in-class treatments to address some of the most important unmet patient needs. We are developing novel, patient-focused solutions that apply our innovative science and technologies to already-approved pharmacological agents for patients suffering from pain or cancer.

On August 9, 2016, our first commercial product, SUSTOL (granisetron) extended-release injection (“SUSTOL”), was approved by the U.S. Food and Drug Administration (“FDA”). SUSTOL is indicated in combination with other antiemetics in adults for the prevention of acute and delayed nausea and vomiting associated with initial and repeat courses of moderately emetogenic chemotherapy (MEC) or anthracycline and cyclophosphamide (AC) combination chemotherapy regimens. SUSTOL is an extended-release, injectable 5-hydroxytryptamine type 3 receptor antagonist that utilizes Heron’s proprietary Biochronomer drug delivery technology (“Biochronomer Technology”) to maintain therapeutic levels of granisetron for ≥5 days. We commenced commercial sales of SUSTOL in the U.S. in October 2016.

On November 9, 2017, our second commercial product, CINVANTI (aprepitant) injectable emulsion (“CINVANTI”), was approved by the FDA. CINVANTI, in combination with other antiemetic agents, is indicated in adults for the prevention of acute and delayed nausea and vomiting associated with initial and repeat courses of highly emetogenic cancer chemotherapy (HEC) including high-dose cisplatin and nausea and vomiting associated with initial and repeat courses of moderately emetogenic cancer chemotherapy (MEC). CINVANTI is an intravenous (“IV”) formulation of aprepitant, a substance P/neurokinin-1 (“NK1”) receptor antagonist. CINVANTI is the only IV formulation of an NK1 receptor antagonist indicated for the prevention of acute and delayed nausea and vomiting associated with HEC and nausea and vomiting associated with MEC that is free of polysorbate 80 or any other synthetic surfactant. We commenced commercial sales of CINVANTI in the U.S. in January 2018. On February 26, 2019, we announced that the FDA approved our supplemental New Drug Application (“sNDA”) for CINVANTI, for IV use, which expanded the administration of CINVANTI beyond the initially approved administration method (a 30-minute IV infusion) to include a 2-minute IV injection.

HTX-011, which utilizes Heron’s proprietary Biochronomer Technology, is an investigational, long-acting, extended-release formulation of the local anesthetic bupivacaine in a fixed-dose combination with the anti-inflammatory meloxicam for postoperative pain management. By delivering sustained levels of both a potent anesthetic and a local anti-inflammatory agent directly to the site of tissue injury, HTX-011 was designed to deliver superior pain relief while reducing the need for systemically administered pain medications such as opioids, which carry the risk of harmful side effects, abuse and addiction. HTX-011 has been shown to reduce pain significantly better than placebo or bupivacaine alone in five diverse surgical models: hernia repair, abdominoplasty, bunionectomy, total knee arthroplasty and breast augmentation. HTX-011 was granted Fast Track designation from the FDA in the fourth quarter of 2017 and Breakthrough Therapy designation in the second quarter of 2018. We submitted a New Drug Application (“NDA”) for HTX-011 to the FDA in October of 2018 and received Priority Review designation in December of 2018. A Complete Response Letter (“CRL”) was received from the FDA regarding the NDA for HTX-011 on April 30, 2019. The CRL stated that the FDA was unable to approve the NDA in its present form based on the need for additional Chemistry, Manufacturing and Controls (“CMC”) and non-clinical information. Based on the complete review of the NDA, the FDA did not identify any clinical safety or efficacy issues, and there was no requirement for further clinical studies or data analyses. In April 2019, we announced that the Marketing Authorisation Application (“MAA”) for HTX-011 was validated by the European Medicines Agency (“EMA”). Validation of the MAA confirms that the submission is complete and starts the EMA's Centralised Procedure. The EMA granted eligibility to the Centralised Procedure for HTX-011 based on it meeting the criteria of a medicinal product constituting a significant scientific innovation. The Centralised Procedure allows applicants to receive a marketing authorisation that is valid throughout the European Union. An opinion from the EMA Committee for Medicinal Products for Human Use (CHMP) is anticipated in the first half of 2020.

HTX-034, our next generation product candidate for postoperative pain management, is in development for postoperative pain via local application. Based on the positive results of preclinical studies in which HTX-034 demonstrated significant pain reduction for seven days, we have initiated formal development of this next-generation postoperative pain management product candidate.

7


As of June 30, 2019 we had $276.0 million in cash, cash equivalents and short-term investments. We have incurred significant operating losses and negative cash flows from operations. Management believes that cash, cash equivalents and short-term investments as of June 30, 2019 will be sufficient to fund operations for at least one year from the date this Quarterly Report on Form 10-Q is filed with the U.S. Securities and Exchange Commission (“SEC”).

2. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for other quarters or the year ending December 31, 2019. The condensed consolidated balance sheet as of December 31, 2018 has been derived from the audited financial statements as of that date, but does not include all of the information and disclosures required by GAAP. For more complete financial information, these unaudited condensed consolidated financial statements and the notes thereto should be read in conjunction with the audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the SEC on February 22, 2019.

3. Accounting Policies

Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements include the accounts of Heron Therapeutics, Inc. and its wholly-owned subsidiary, Heron Therapeutics B.V., which was organized in the Netherlands in March 2015. Heron Therapeutics B.V. has no operations and no material assets or liabilities, and there have been no significant transactions related to Heron Therapeutics B.V. since its inception.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes to the financial statements. Our significant accounting policies that involve significant judgment and estimates include revenue recognition, inventory and the related reserves, accrued clinical liabilities, income taxes and stock-based compensation. Actual results could differ materially from those estimates.

Cash, Cash Equivalents and Short-term Investments

Cash and cash equivalents consist of cash and highly liquid investments with contractual maturities of three months or less from the original purchase date.

Short-term investments consist of securities with contractual maturities of greater than three months to one year from the original purchase date. We have classified our short-term investments as available-for-sale securities in the accompanying unaudited condensed consolidated financial statements. Available-for-sale securities are stated at fair market value, with net changes in unrealized gains and losses reported in other comprehensive loss and realized gains and losses included in other income (expense), net. The cost of securities sold is based on the specific-identification method. Interest and dividends on securities classified as available-for-sale are included in interest income.

Our bank and investment accounts have been placed under a control agreement in accordance with our Senior Secured Convertible Notes (“Convertible Notes”) (see Note 8).

Concentration of Credit Risk

Cash, cash equivalents and short-term investments are financial instruments that potentially subject us to concentrations of credit risk. We deposit our cash in financial institutions. At times, such deposits may be in excess of insured limits. We may also invest our excess cash in money market funds, U.S. government and agencies, corporate debt securities and commercial paper. We have established guidelines relative to our diversification of our cash investments and their maturities in an effort to maintain safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates.

8


Our products are distributed in the U.S. through a limited number of specialty distributors and full line wholesalers (collectively, “Customers”) that resell our products to healthcare providers and hospitals, the end users.

The following table includes the percentage of net product sales and accounts receivable balances for our three major Customers, each of which comprised 10% or more of our net product sales:

 

 

 

Net Product Sales

 

 

Accounts

Receivable